Shanghai Jinqiao Export Processing Zone DevelopmentLtd's (SHSE:600639) Profits May Not Reveal Underlying Issues

The recent earnings posted by Shanghai Jinqiao Export Processing Zone Development Co.,Ltd (SHSE:600639) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for Shanghai Jinqiao Export Processing Zone DevelopmentLtd

Examining Cashflow Against Shanghai Jinqiao Export Processing Zone DevelopmentLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Shanghai Jinqiao Export Processing Zone DevelopmentLtd has an accrual ratio of 0.33 for the year to December 2023. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of CN¥1.82b, a look at free cash flow indicates it actually burnt through CN¥6.7b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥6.7b, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Jinqiao Export Processing Zone DevelopmentLtd.

Our Take On Shanghai Jinqiao Export Processing Zone DevelopmentLtd's Profit Performance

As we have made quite clear, we're a bit worried that Shanghai Jinqiao Export Processing Zone DevelopmentLtd didn't back up the last year's profit with free cashflow. For this reason, we think that Shanghai Jinqiao Export Processing Zone DevelopmentLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Nonetheless, it's still worth noting that its earnings per share have grown at 64% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Shanghai Jinqiao Export Processing Zone DevelopmentLtd as a business, it's important to be aware of any risks it's facing. For example, Shanghai Jinqiao Export Processing Zone DevelopmentLtd has 4 warning signs (and 2 which are significant) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Shanghai Jinqiao Export Processing Zone DevelopmentLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.